Life settlements are the wild west of the investment industry

I’ve been getting scolded by a portion of the life settlement industry because I recently used a couple of unpopular terms in my Fort Worth Star-Telegram Dave Lieber column to describe so-called “life settlement contracts.” That’s the more acceptable term used to describe the investment process in which holders of life insurance policies in need of quick cash sell their policies to others.

The investors pay the premiums until the person died. Then all the benefits go to the investors, instead of the original beneficiaries of the policy. If someone lives longer than expected, investors may lose money. The policy holders, however, get their cash while they are still alive.

I called them by their nicknames — ”death bets” or “death contracts.”

Really, that’s what they are, because the investors are betting that the elderly whose policies they purchased will actually die when the actuarial tables say they will. If they don’t, investors lose.

He adds, “Life settlements are not unique in thinking about mortality. In annuity sales, there is a profit motive related to early termination of the annuity. Insurers benefit the sooner the death occurs in an annuity transaction. Is that a ‘death bet’? Pension plans benefit if their pensioners die in a short time rather than in a long time? Is that a ‘death bet?’

“This sort of language is an unnecessary diversion that focuses from the serious and simple fact that longevity or aging are serious issues.”

I also heard from Life Partners, Inc., a Waco, Texas company in the life settlement business: “Frequently, we see the media use this negative, emotionally charged phraseology to describe life settlement investing. However, in our experience, the only folks that label life settlement investments using ‘death’ in its phraseology is the media. Industry participants do not generally use this phraseology.”

The company also sent me an example of its advertising. I was a little taken aback to learn that one of the greatest ad pitchman of the past century — Ed McMahon — is still selling. From the grave. In the company’s ad, his photograph is displayed along with a testimonial from his widow attesting to how Ed sold his life insurance policy when he was desperate for cash before his death. And you thought Donald Trump rescued the McMahons when he bought their house for them to avoid foreclosure? Think again.

The top regulator of these “bets” in Texas says of the life settlement industry, “It is the wild west. It’s always been a problem, but the amount of fraud we’re seeing now has, anecdotally, increased tremendously.”

Call it whatever you want. This is a serious problem.

Retirement Value LLC of New Braunfels, Texas has been placed into receivership by the state which charged it with fraud and deceptive practices. The company and two executives were charged with defrauding Texas investors, violating securities laws and not properly disclosing relevant information to investors. The state has seized $22 million in assets.

Court papers allege that Retirement Value collected $65 million from more than 800 investors, whom company President Richard Gray and Chief Operations Officer Bruce Collins promised a “baseline expected income” at an annual rate of 16.5 percent.

Securities board spokesman Robert Elder told me that investors should be “extremely cautious” when a promised rate of return is that much higher than the guaranteed return on government-backed investments such as certificates of deposits and Treasury bonds.

Of the $65 million invested in Retirement Value, $9 million was paid as commissions to unregistered sales agents selling life settlement investments on behalf of Gray’s company, the state charges, and company officials and other investors kept another $8 million.

Earlier this year, the state charged AGAP Life Offerings of Plano, Texas of not being licensed and registered and making promises to investors that were misleading and deceptive.

Last year, the state securities board seized millions of dollars in the accounts of National Life Settlements of Houston. The company was charged with running a $30 million fraud. The state securities board used undercover agents posing as investors and sellers to make its case against the company.

The feds also charged American Settlement Associates of Houston in March of a fraud scheme that netted $2 million. The Securities and Exchange Commission says company owners used the money “for lavish personal and business expenses, including jewelry and casinos.” The company is in receivership.

Texas’ top regulator, Joe Rotunda, says one reason these “bets” are such risky business is because investors can’t verify the assertions of promoters about the life expectancy of the policy holders. Is the policy holder as ill or as elderly as promoters say? Who knows? Investors aren’t supposed to know whose policies they are buying.

Companies that stay out of trouble say these troubled companies give them a black eye.

Life Partners says the primary reason it became a publicly traded company was to “create transparency for investors.”

“To these day, we are the only publicly traded company in our industry,” LP says. “As such, any investor can examine our financial statements to ascertain the financial health of the company.” The company is also audited annual, an additional layer of protection, it says.

There’s a smart way, though, to check it out before you jump in on these investments: contact your state’s securities board and ask them to look up the individuals and companies you are dealing with. Find out if they are properly licensed and registered. Check with your state’s Department of Insurance, too.

Comments

I have been talking to Kevin at Penumbra Solutions in Keller, TX about investing in Life Settlement Contracts. He is a big proponent of this as an investment stategy. I believe he only does business with Life Partners of Waco. Do you know anything about Penumbra Solutions? If so, would you recommend them?

Life Partners of Waco is not in the kind of trouble or anywhere close to what happened to the Austin company I researched. I don't know anything about the company you asked about, but you can research it thoroughly by using Google. I would also suggest a visit to your local library and ask the librarian to show you the many resources available online now to look at businesses and histories. Librarians are the best. Of course, my award-winning book, Dave Lieber's Watchdog Nation: Bite Back When Businesses and Scammers Do You Wrong, goes into great detail on searching methods I use that I want everyone to know about.

Dave do you go fishing on Pardo's boat too. Seem pretty smug about LPHI/LPI in times of life settlement upheaval in TX. You should ask LPHI how come they are forwarding premium payments for investors and how accurate their Life Expectancies are. What about just tapping them about how entrepreneurial effort comes into play as they attempt to prevent investors from losing their money when other fractional owners no longer want to pay the premiums on policies that have exhausted the premium reserves LPI set up.
Yep there is some interesting aspects in Waco.
If you're an investigative reporter and do some research and speak to regulators from Colorado, Utah, Virginia…etc….you may get a Pulitzer.

It seems that you have info that is not able to be found anywhere else. Are you a disgruntled former employee or do you work for another life settlements company or are you one of the famous short-sellors of the LPI stock?

I'm all ears if you have legit findings from a solid source, but right now, you won't win your Pulitzer nor will you win with the investment either. I guess double digit returns are not good enough for you, while they seem to be a LOT higher than most investments today that an accredited investor can be involved in without taking a HUGE risk in so doing.

Put your info on here to be verified. The regulators in Colorado, Utah, and Virginia didn't see a "scam" or a compelling reason to say there was fraud involved. Their issues were on whether this is a security or not, an issue that is valid. While you are at it, talk to some of the 6000 + people that have benefited from the sale of their policy to LPHI and also, from the 2500 or so policies that have matured and see if the investors are having issue with the company. I believe there would be "hollering" loud enough to be heard in even your part of the world if there were that many issues!!!

I understand on the double digit info. It is scary for sure….however, these are published returns of the company for the past 10 years. Ernst and Young are the auditors, so I'm assuming (bad word), that before they can go off and publish such info, that the auditors have at least looked that over. Their books are wide open to the public since they are publically traded and so, as such, I'm much less concerned about them being a scam group which has happened just recently in Texas as you mentioned.

Now regarding the three links you put above, all written by WatchDog, I failed to see anywhere that LPHI was mentioned in those articles, although I'll admit I read them VERY quickly. Just so you know, I had been in contact with Dave Lieber, and had asked him if he knew of any issue with LPHI. He said from his view they were clean, although sometime ago they had had some issues. I don't believe Dave would publically endorse any company, b/c just like you and me, we don't know everything there is to know UNLESS you are on the inside. However, this company from what I can tell is about as clean as you can get. Where the issue once again is and will continue to be, is this a sale of a security or not? I think if LPHI has any troubles, it will be around that issue and not the integrity of the company. In "SEC v Life Partners", the judge ruled that as LPHI sells them, they are not a security, however recently that interpretation has been subject to a large amount of questions by a subcommittee of the SEC. I think further clarity is to come, but until then, I don't think LPHI should be lumped in with all the "evils" in this industry. They have a track record that can be easily looked at.
Again, this is my opinion after days and weeks of studying the investment and this company specifically. To invest, you must be an "accredited" investor, so folks that invest with LPI should not just have $50k in their retirement savings agcount like was described in the group that was fraudulent. If you can show me "fraud" or specific impropriety on LPHI's part, again, I'm all ears. But make sure it's verifiable and accurate, not rumor and speculation.

I totally agree Dave. There are issues within the industry. That's the reason for me anyhow, that if you are going to invest in life settlements, you know all you can about the company, the published info on it and you know the risks, which there are risks. IF anyone thinks they can invest in the stock market and there are not risks or real estate or any other thing of value, they are sadly mistaken. I like the way LPHI does business. They have a law firm that handles all the investor's money. A firm that has a great reputation. LPHI never touches the investors money. It is my money held in escrow at Dunnam and Dunnam LLC Escrow. The ultimate financial payoff goes directly to Dunnam and Dunnam, not to LPHI. LPHI is publically traded which allows all of us to examine their financials and to see how well run the company is. They have almost NO debt and have done a great job of returning stock investors quarterly dividends that amount to around 6%. And, in 2009, they were the number 1 company in terms of growth published by the Fortune Small Business magazine. They again achieved a high ranking in 2010. These things don't happen by chance.
I'm not a coolaid drinker. I research these companies and know as much about them as I possibly can before I buy their product. And I know the market. It has risks, but this company has returned significant returns to investors of life settlements, primarily b/c they buy these policies at such discounts to face value. Accurials make a difference, but they are able to miss the target b/c of the discounts. It gives more wiggle room for error.
Then the other side of the investment. Ed McMahon's wife can tell you how well the policyholder is treated. Significantly more money than she could have gotten from her own insurance company.
I just like the investment return compared to the risk involved. I don't know of many purchases I've made that I've been more satisfied with. Hadn't made a dime yet, but it's just a matter of time. An investor just has to sit back and wait…..and that's not meant to be disrespectful of the person who's death it is that I am waiting on. One out of one dies. And they knew going into this deal that their death is what makes the investment. For them to sell, they must have buyers. By my buying one of these so called "death bets", I haven't sped up that person's demise by one minute. It will happen to you and to me at some point in time.
Do your research and I think you'll find this to be a good bet without having to worry if the stock market goes down 2000 points or if some world event or 9-11 happens again. One more big event like that and people in the stock market will see significant depreciation in their stocks…at least that's my thinking. Hope it doesn't happen, but it is one of those "risks" that has to be considered. Plus there are sooooo many things about the stock market that I have no control over. By the time I get in, I may or may not be buying at the right time. With life settlements, I buy at the lowest point and I'm forced out at the highest price. Not a bad deal.
Blessings and I hope you and Suva Crew and all your readers do well financially in the coming decade. It is about time for some good things to happen.